Getting ready to put down roots in a home of your own? It's helpful to understand everything that's involved in the mortgage loan process before getting started. Here are 15 steps to buying a house.
1. Understand your housing needs and wants
You're about to embark on one of the most exciting times of your life. Part of that means making a significant purchase. By taking the time to understand your needs and wants thoroughly, you can narrow down your house shopping and avoid buying too much or too little home.
Consider the following questions:
- Is this your forever home or do you plan to move in a few years?
- Are you looking for something rural or urban?
- Do you need bedrooms for children or visiting guests?
- Do you have pets that need a large yard?
- What is your commute to work?
- What are your schooling needs?
- Are your family and friends nearby?
- Are you close to the places you like to hang out and shop?
- Will you have access to amenities like pools and gyms nearby?
Create a detailed checklist of your needs and wants, but also understand that as you start your search, you may adapt this list as you learn more and view homes for sale.
2. Check your credit score
Your credit score is a number based on the information in your credit history, taking into account several factors including the type and amount of debt you have and your repayment history. The higher your score, the more responsible a lender sees you at handling debt – leading to loan approval and a better interest rate.
It's important to check your credit score early in this process for two reasons:
- Potential errors – It's not uncommon for credit reporting services to have errors on your credit reports. If there are errors, there are simple steps you can take to have your credit fixed and updated.
- Opportunity to improve your score – If your score is not ideal, you can take steps to improve your score before applying for a mortgage, such as paying down current debts. Anything you can do to improve your credit score will help increase your likelihood of mortgage approval and a better rate.
3. Know what you can afford and make a budget
If you’re wondering how much to spend on a house, or if buying is even within reach, a good place to start is with a mortgage affordability calculator. This allows you to input some basic financial details and generate potential home costs and a range of loan terms and rates based on your expected monthly payment and how much debt you want to take on.
And remember: A monthly mortgage payment is only part of buying a home. There are several other possible costs to be prepared for as you create your home buying budget:
Amount to Budget
3%–20% of purchase price
2%–5% of purchase price
Refer to your results from the affordability calculator
Annual, but often spread out monthly and added to mortgage payment
Varies based on property location and value; median in U.S. is $2,375
Annual, but often spread out monthly and added to mortgage payment
Varies based on many factors; average in U.S. is $2,218–$3,839
Mortgage Insurance (if necessary)
Monthly, often added to mortgage payment
.5%–5% of original loan amount
$680–$20K+ based on type of move
Homeowners Association (HOA) Fees (if necessary)
.5%–1% of purchase price
Misc. Maintenance, Tools, Furniture, Decorations, etc.
Varies based on household needs
4. Get prequalified for a mortgage
Prequalification is not required, but it’s a great first step in establishing a relationship with a mortgage lender. The process varies, but usually involves you sharing some preliminary income details. The lender then completes a credit check to make that initial estimate of how much home you can afford. The result: You have some initial parameters as you begin your search.
5. Find a home
This is typically the fun part. Armed with the basic financials from your prequalification, you can find a real estate agent and start looking at houses. This step can sometimes go quickly or take longer as you evaluate different neighborhoods, school districts, and types of homes, and see how they compare to your list in step 1.
6. Get preapproved for a mortgage
Preapproval moves you closer to mortgage approval. To get preapproved, your lender will need additional financial information such as bank statements, pay stubs, and a full credit report. This is still not a guarantee you’ll get a loan, but preapproval shows real estate agents and the seller that you are a serious contender.
Be prepared to supply:
- Proof of income
- Proof of assets
- Bank statements for the past two months
- Retirement and brokerage accounts statements
- Employment verification
- Credit score verification
- Additional information as needed
7. Make an offer
With your preapproval letter in hand, your search for the perfect home can take the next step in making an offer to the seller. Your real estate agent can help you get an accepted offer. Here are some of the many points to consider:
- How old is the home, what kind of work does it need, how long has it been on the market, and how fast have other homes in the area been selling?
- What are similar properties like in the area, and how do they compare in price, location, and amenities?
- Is your offer too low that it may insult the seller?
- Is it a buyers’ market or a sellers’ market?
8. Apply for a loan
Congratulations – your offer is accepted! Now that you have a signed sales contract with the home sales price, it’s go time. Your lender will ask for updated financials including your most recent bank statements and pay stubs, and any other documentation needed. It’s important during this time to avoid making a job change or taking on new debt without talking to your lender first.
9. Lock in your rate
Once you've applied for a loan, you'll want to keep an eye on interest rates to estimate when the best time is to lock in your rate with your lender. For example, if interest rates seem to be on the rise, you may want to lock in immediately before rates climb higher. The opposite also holds true if interest rates are trending downward. You may want to hold out locking in your rate until the last minute to take advantage of any further rate reductions.
10. Review your loan estimate
A loan estimate is delivered to you within three business days of your completed application. This three-page document is not an approval, but merely an estimate of important figures of your loan if your application is approved. It includes:
- Projected monthly payment with principal and interest
- Loan term and the total potential amount you’ll borrow
- Estimated closing costs and cash needed at the time of closing
11. Get an inspection
A home inspection is carried out by a licensed inspector. He or she walks through the property and provides a detailed report of the roof, appliances, heating and air conditioning, windows, plumbing, and more. A good inspector will document in writing and with photographs.
The inspection report will give you a good idea of the property’s condition and whether you want to move forward. It also lets you know what will need repairing or replacing later if you buy the home. Depending on what comes up, you may choose to renegotiate with the seller to pay for some of the repairs or reduce the sale price.
12. Get an appraisal
Separate from an inspection, an appraisal focuses on a home’s monetary value. The appraisal is completed by an unbiased third party whose job is to understand the values of homes in the area and how this property might compare.
The appraisal justifies to the bank the loan amount that could be available for the home. In other words, an appraisal protects the lender from lending more money than the home is worth. If the appraisal comes in lower than the asking price, it’s back to the negotiating table.
13. Wait for underwriting
Underwriting is the process of reviewing and verifying the documents you provided in your loan application. Your lender reviews the appraisal, verifies your income and credit score, and examines your assets. During this process, you may be asked to supply additional supporting documents, information, or letters to support your application. The underwriting process for a mortgage is often completed within a few days, but sometimes can take weeks.
14. Review your loan closing disclosure
Much like the loan estimate, a closing disclosure supplies what is now the detailed and expected final information concerning your loan. The document will be delivered to you within three days of closing so that you completely understand all of the financial requirements and closing costs.
15. Close on your loan
Closing day is an exciting time and you should have your signature hand well-rested, as there are a lot of papers to sign. Beforehand, you'll need to make a wire transfer or get a cashier’s check with the cash to close as outlined on your closing disclosure. Once all the documents have been signed and notarized, you will likely be given your keys and your new life in your new home begins.